Economic Policy in the Open Economy Essay Example | Topics and Well Written Essays - 1750 words

Economic Policy in the Open Economy - Essay Example The balance of payments is based on the principle of double entry bookkeeping and the monetary value of every transaction is recorded as both a credit and a debit. Debits and credits in the balance of payments are collected into groups on the basis of what is exported or imported. The partitioning of these groups varies between countries however. We generally divide the balance of payments into four traditional subdivisions: current account, unilateral account, capital account, and gold account, these in return contain the value of goods and services either exported or imported plus dividend and interest income and payment, second entry for gift received, imports and exports of assets like bonds and common stocks and, the import and export of gold for commercial purposes, respectively. The import of a bond or any asset similar in context is recorded as a debit in the capital account. Since its purchase results in the country’s residents paying out money or capital, the import of a bond, like any other debit entry in the capital account, is called a capital outflow. On the other hand, the export of a bond means the residents actually receive money or capital; and thus, the export of a bond, like other credit entries made in the capital account, is called a capital inflow. ... According to the Statistical Bulletin, The UK’s current account deficit was recorded to be ?15.2 billion in the third quarter of 2011, the highest value recorded as yet. Its trade deficit extended to ?9.9 billion in the third quarter of 2011, an increase of ?2.7 billion since the previous quarter. The income surplus was ?0.3 billion which is actually the smallest surplus ever since the fourth quarter of 2000. Moreover, the international investment position recorded UK net liabilities of ?245.5 billion at the end of the third quarter 2011 which outweigh the inward investment of ?22 billion by at least ten times. In the recent picture, the increasing balance of payments deficit is only adding to the mound of problems. The repercussions produced by slowdown in exports followed by increasing faster growth in imports of goods and services caused by a rise in the value of sterling against other currencies has indeed led to a worsening balance of payments’ position. Due to the increasing deficit, the government has responded by the introduction of tough austerity measures aimed at narrowing the budgetary deficit; however this has only led to soaring unemployment and rising business bankruptcies. There is a loss of employment because UK businesses are losing market share and output to cheaper imports from overseas. A fall in business confidence and a decline in capital investment spending by UK exporting firms have been witnessed primarily because of the continually declining aggregate demand. Balance of payments deficits are nearly always bad for the economy, except if a country is importing a high volume of goods and services to make available diverse resources to its citizens. However, in the long term if the trade deficit is a symptom of a weak economy and a lack of